What’s going to
happen next at TATA?
Savvy comment in knowledgeable circles has it that the Tata
Group under Mr. Cyrus Mistry is going to ramp up its infrastructure contracting
capabilities. This is his great strategic ace coming up. Right now TATA is not
even in the top ten in the field, but fellow Mumbai based neighbour and friend
L&T heads the “infrastructure” list. But L&T, that is all it does, at a
turnover of around $15 billion per annum. It lacks TATAs strategic depth. And
TATA is, as we know a “salt to software conglomerate” with its own Tata Administrative Service (TAS) and over 363,000 employees to draw upon.
That TATA should be looking at contracting/infrastructure
for its quantum leap towards perhaps doubling its current size of about $75
billion in revenues, is not surprising. The domestic potential, even as identified
by the Government and various analysts including a recent PWC report, holds it
in trillions of US dollars. At $150 billion therefore TATA would be in the same
league as GE, amongst the biggest conglomerates in the US.
This is when, at $75 billion, it is already the biggest
Indian/Indian multi-national private sector group give or take versus Reliance,
as we stand. It has grown to many times the size it was in JRD’s day by the
time Ratan Tata passed on the baton recently. It is also a multinational with
over 60% of its turnover, and sometimes the bulk of its profits coming from its
overseas holdings and operations. But the downturn abroad is forcing a rethink
on where to focus.
Ratan Tata may have expanded abroad to get away from our
over- regulated and corrupt market and to achieve the inorganic growth that he
has. But the business scenario abroad is no longer good. Corus is losing money.
Jaguar/Landrover is making profits but from its Chinese sales. Tetley Tea is
doing alright, as are the hotels in the main, but nothing terribly exciting is
happening abroad. Even Laxmi Mittal, the steel baron and owner of Arcelor is
having a hard time of it.
Also Cyrus Mistry, the former MD of Shapoorji Pallonji, one
of India’s biggest private sector quality civil contractors has taken over and
understands this space. With companies like AFCONS in the S&P Group, the
infrastructure space is not unknown to the Mistrys.
But the scale on
which he could potentially operate in TATA is much larger. There are also
engineering and management synergies possible on a very different level from
S&P which in the end is a family-owned and managed business.
And with greater
private sector participation being invited and inevitable in infrastructure
development, alongside FDI, there is a lot of money to be made in
infrastructure building in a grossly under- built country like India.
But this foray envisages much more than building buildings
and colonies and hotels and institutional buildings or even flyovers. We are
looking at roads, ports, railways, electrical projects, defence contracting
etc. etc. With the TATA heft, the Group
could also tie up with the major international players with not an awful lot to
do in recessionary times abroad. TATA could also buy up good strategic fits
internationally in this field as it has done in other areas of business.
The balance to be maintained is of course in the degree of
leveraging undertaken. Even a great company can ruin its prospects with too
much debt. An element of this is already troubling the TATAs.
In combination with cutting- edge foreign companies, they
could be a potent, professional, modern and specialised force, and not just in
India. And, potentially cost effective too, though India’s work force is no
longer as cheap as it once was.
At the expertise end, the idea of imported talent is not new
to the TATAs. There is some of it afoot presently right at the top in both Tata
Motors and Indian Hotels for example. And they started Tata Steel in the face
of imperial scorn using British Engineers way back when.
Cyrus Mistry’s job is
to grow the group to double its size over the next several years, to compete
with the international big boys. This is difficult to do with product sales
alone however well done. Hence the likely new thrust area.
Besides the motivation
is likely to be very high. Mistry is young and along with his brother Shapoor,
he owns 18% of the Tata shares. The Pallonji family are the only significant
individual shareholders. The bulk of the shares, over 60% are, of course, owned
by the fabled Tata Trusts. This also makes for TATAs unique brand of
professionalism in the functioning, imbued with the ideal and atmosphere of
trusteeship that distinguishes the Tata Group.
(779 words)
May 5th,
2013
Gautam Mukherjee
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